The Treasury yield curve is one of the best and most applicable tools that a global macro investor can have in his or her toolbox. Most of the time used for bond trading there are several applications for it in the stocks and currency market as well. The truth is by using the yield curve correctly you can better trade just about everything.
While there are may types of yield curves the most commonly used and most applicable is that of the Treasury yield curve. All you need to do to make a yield curve is to obtain the yield on different Treasury maturities. Get the ninety day, two year, five year, ten year, and the thirty year yields and you will be able to plot them out and see the shape and levels of the yield curve.
This is great but how do you use it to make money? Well the global macro investor knows that if the curve is sloped from the lower left to the upper right that things are looking good for the economy. If on the other hand it is sloping downwards the Fed has tightened and the economy is or will be slowing.
You may be asking yourself why this is. The reasons are actually fairly simple and straightforward. If the curve is steep, meaning the short term rates are low and the long term rates are high it means that banks are lending as they are able to borrow short term from the Fed and charge long term rates to their customers. Obviously when business is good for the banks, they will be lending as much as they can. This in turn spurs new business spending as money is available.
If money is expensive then the economy will have a hard time expanding. If money is expensive for banks then they will not lend very much as they are not making money off of it. If money is cheap then the economy can grow easier as banks will lend and businesses will borrow more to expand and to spend.
Bonds are like a lever. When bonds are high yields are low. When yields are low bonds are high. It is like a board on a fulcrum, when one end goes up the other end goes down. This is how bonds and rates are related.
So anytime that you see either of these events happen the global macro investor can start to look for an entry point to either buy or to sell bonds and stocks. If the curve is inverted then you will likely want to start buying bonds and selling stocks as the act of lowering rates will cause bonds to go up. After bonds have gone up and it looks like the Fed is done lowering rates it is worthwhile to look at stocks as the next beneficiary of the rate cuts as businesses can now borrow cheaper and therefore expand faster.
Nothing is perfect and nothing works all the time. Any good global macro investor knows that to have long term success without blowing up you will need to use proper risk control gauges as well as other tools in your analysis. The yield curve is smart but it is not all knowing. - 22871
While there are may types of yield curves the most commonly used and most applicable is that of the Treasury yield curve. All you need to do to make a yield curve is to obtain the yield on different Treasury maturities. Get the ninety day, two year, five year, ten year, and the thirty year yields and you will be able to plot them out and see the shape and levels of the yield curve.
This is great but how do you use it to make money? Well the global macro investor knows that if the curve is sloped from the lower left to the upper right that things are looking good for the economy. If on the other hand it is sloping downwards the Fed has tightened and the economy is or will be slowing.
You may be asking yourself why this is. The reasons are actually fairly simple and straightforward. If the curve is steep, meaning the short term rates are low and the long term rates are high it means that banks are lending as they are able to borrow short term from the Fed and charge long term rates to their customers. Obviously when business is good for the banks, they will be lending as much as they can. This in turn spurs new business spending as money is available.
If money is expensive then the economy will have a hard time expanding. If money is expensive for banks then they will not lend very much as they are not making money off of it. If money is cheap then the economy can grow easier as banks will lend and businesses will borrow more to expand and to spend.
Bonds are like a lever. When bonds are high yields are low. When yields are low bonds are high. It is like a board on a fulcrum, when one end goes up the other end goes down. This is how bonds and rates are related.
So anytime that you see either of these events happen the global macro investor can start to look for an entry point to either buy or to sell bonds and stocks. If the curve is inverted then you will likely want to start buying bonds and selling stocks as the act of lowering rates will cause bonds to go up. After bonds have gone up and it looks like the Fed is done lowering rates it is worthwhile to look at stocks as the next beneficiary of the rate cuts as businesses can now borrow cheaper and therefore expand faster.
Nothing is perfect and nothing works all the time. Any good global macro investor knows that to have long term success without blowing up you will need to use proper risk control gauges as well as other tools in your analysis. The yield curve is smart but it is not all knowing. - 22871
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